China looks to domestic demand for recovery

As the globe continues to battle with the coronavirus pandemic, China will rely on domestic demand to support its economic recovery - but could struggle to find the ‘V’ shape many are hoping for.

The good news is ANZ Research still expects Chinese economic activity to approach something close to normalcy by the middle of April.

China’s industrial production capacity is expected to normalise by that period and, given continued global uncertainty, domestic demand will be the growth driver. But the recovery in other sectors, particularly retail, will be much tougher.

As a result, a gradual restoration of growth in the second half a year is likely. However, China is unlikely to register its growth potential of 5 to 6 per cent in 2020, according to ANZ Research.

The growth outlook remains very cautious. Significantly weak conditions in the United States and Europe will weigh supply chains, inevitably impacting of Asia. It is not out of the question for the downturn in exports from China to reach 20 or 30 per cent.

This will be mitigated to some extent by a rise in manufacturing demand for things like facemasks and medical supplies, much of which originates in China.

Cash flow conditions remain tight in much of the Chinese private sector. SMEs are under pressure. There are some sectors ANZ Research is keeping an eye on such as property and construction. These could be key risks facing the recovery as the workforce slowly resumes operation.

"Given continued global uncertainty, domestic demand will be the growth driver [of China’s recovery]"

Response

Chinese policymakers have responded to the crisis with a suite of short-term measures but are yet to launch a large-scale response.

ANZ Research expects a grand plan presented by the time China holds its National People's Congress, currently expected toward the end of April or early May.

There has been discussion around a ‘New Infrastructure Investment Plan’ but a repeat of the scenario seen during the response to the global financial crisis (massive hard infrastructure investment) is unlikely.

ANZ Research is reluctant to describe any ultimate move as a ‘stimulus plan’ because it is unlikely China will use traditional measures of monetary policy easing.

Unlike the US Federal Reserve and the central banks from other G7 nations, China’s central bank is very measured in its approach. In many ways the bank has learned not to fill up its debt levels and will be particularly targeted in terms of policy approach.

ANZ Research expects countercyclical measures to be delivered primarily through fiscal policy (including tax cuts, consumption support and SME support) and encouraging the state-owned enterprise investment pipeline. China’s government will still be mindful of debt growth and increasing macroeconomic leverage.

The government will be determined to achieve the first centennial goal which requires a real gross-domestic growth of 5.6 per cent in 2020, although it seems to be unrealistic given the economic outlook in 2020.

Raymond Yeung is Chief Economist, Greater China at ANZ

This story is based on a presentation given by Yeung on an AustCham Hong Kong webinar on March 25 2020.